Outside the United States, a 2008-style housing related insolvency crisis looms

by random20190826

I am not a doomer, but I am a Canadian and I know that countries outside of the United States of America do not usually have fixed rates for mortgages for any term beyond 10 years. If they exist, the rate is very far above shorter mortgage terms. In Canada, 10 year fixed mortgage rates have doubled (from 2.99% to 5.94%) from the lows in 2020 to the current rate. 30 year rates are almost unheard of. The only 25 year fixed mortgage is offered by the Royal Bank of Canada and is currently quoted at 9.75%.

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Because of a long term downtrend in interest rates between the early 1980s to 2021, personal finance subreddits like r/PersonalFinanceCanada as well as people in real life have recommended for decades that borrowers choose variable mortgages. Those mortgages have rates that fluctuate based on the Bank of Canada’s key interest rate, which has gone up repeatedly in 2022. Mortgage contracts require that all borrowers must pay all of the interest due even if the principal is not being paid down at all. When interest rates rise substantially, the amount that a borrower is paying may not be sufficient to pay off the interest and as such, payments go up, sometimes by $2000 a month. Unless a borrower was very frugal and has very high income, this is a financial disaster.

Now, we know that inflation is very high in a lot of countries (except China and Japan, in bot cases due to severe population aging and for China, draconian lockdowns severely curtailed economic activity). Despite wages going up nominally, they have not kept pace with inflation. In 2008, it took only a small segment of borrowers defaulting to bring down the housing market in the US, and in 2023, it will also only take a very small number of borrowers defaulting in the fastest rate hiking cycle in nearly 50 years to bring down multiple housing markets and clog up the court systems with personal bankruptcy cases.


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